Financial Performance Analysis: Key Metrics for Business Success

Financial performance analysis is key within businesses of all sizes, to ensure a healthy cash flow and a successful future. The process involves evaluating the health and performance of a company through various KPIs, which can then guide stakeholders into making more informed decisions about moving the business forward. Understanding these key metrics can help businesses carry out a SWOT analysis, identifying strengths, weaknesses, opportunities and threats when it comes to business growth. This blog will explore the key metrics to measure and analyse for business success.

Revenue & Revenue Growth

Revenue is the total income generated from the sale of goods or services, and is a key indicator of the overall financial health of a business. Revenue growth measures the percentage increase in revenue over a set time, so is another important metric to monitor. Consistent revenue growth shows that a business is expanding rapidly and selling more goods or attracting more customers (for a service-based business). It is always a good idea to compare revenue growth against others within your industry to see how competitive you are in the bigger picture.

Gross Profit Margin

Gross profit margin measures the percentage of revenue that exceeds the cost of goods sold, so is a better indicator of the actual profit a business is making. A higher profit margin indicates better operational costs. By analysing trends in gross profit margin over time, you will be able to quickly identify any changes in pricing or potential production issues.

Operating Profit Margin

Operating profit margin measures the percentage of revenue that remains after deducting operating expenses (excluding tax). This is calculated by dividing the operating profit by revenue and multiplying this figure by 100. If you have access to the operating profit margin of your competitors, this is useful as you can gauge how efficient your operations are. A decrease in your operating profit margin may suggest an increase in operating costs, or inefficiencies within the business.

Net Profit Margin

Net profit margin takes into account tax and interest, so is the final revenue figure you are left with. It is calculated by dividing the net profit by revenue, and multiplying by 100. Net profit margin is a true indicator of overall profitability, and having a healthy net profit margin will ensure the long-term financial stability of your business.

Return on Assets / Equity

Return on Assets is a measure of how efficiently a company uses its assets to generate profits, whereas Return on Equity is a measure of how effectively a company is using investor funds to generate profits. Both are incredibly important KPIs to monitor as they highlight how effectively the business is using both company resources and finances.

Cash Flow Analysis

Cash flow analysis is fairly self-explanatory, and looks at the inflows and outflows of cash within the business. There are a few types of cash flow to be aware of: operating cash flow (cash generated from core business operations), investing cash flow (cash used for investment in assets), and financing cash flow (cash flow related to debt and equity). Positive operating cash flow is essential for a business to survive. A negative cash flow in investing circumstances can indicate that a business is expanding and growing.

Implementing Financial Performance Analysis

When it comes to implementing financial performance analysis, regular monitoring of these KPIs is incredibly important. Ideally, these should be reviewed quarterly to tie in with VAT returns and will enable informed decision-making for the next quarter. If you can, compare your financial performance against those within your industry as it may be that some months you experience negative cash flow, but this is completely normal as your competitors are dealing with the same thing. Seasonal fluctuations should also be taken into consideration when measuring financial performance. Use financial software where possible as this automates both data collection and data analysis. It also ensures your financial records are accurate as there is less room for human error. It is also a good idea to engage with financial advisors like Wright Vigar to help provide expert insights and recommendations based on your financial data.